AmerisourceBergen 2005 Annual Report Download - page 22

AmerisourceBergen Corporation 2005
-20-
Income from continuing operations of $474.9 million for the
fiscal year ended September 30, 2004 reflects an increase of 7% from
$443.1 million in the prior fiscal year. Diluted earnings per share from
continuing operations of $4.12 for the fiscal year ended September 30,
2004 reflects an increase of 5% from $3.91 per share in the prior fiscal
year. The gain on litigation settlement less costs of facility consolida-
tions, employee severance and other, and the loss on early retirement
of debt increased income from continuing operations by $4.2 million
and increased diluted earnings per share from continuing operations
by $0.04 for the fiscal year ended September 30, 2004. Costs of
facility consolidations and employee severance and the loss on early
retirement of debt had the effect of decreasing income from continuing
operations by $8.0 million and reducing diluted earnings per share
from continuing operations by $0.07 for the fiscal year ended
September 30, 2003.
During fiscal 2005, the Company decided to discontinue the
operations of its patient safety software and cosmetics distribution
businesses as a result of their divestiture. Loss from discontinued
operations, net of tax, was $6.5 million and $1.8 million for the fiscal
years ended September 30, 2004 and 2003, respectively.
Net income of $468.4 million for the fiscal year ended September
30, 2004 reflects an increase of 6% from $441.2 million in the prior
fiscal year. Diluted earnings per share of $4.06 in the fiscal year ended
September 30, 2004 reflects a 4% increase as compared to $3.89 per
sharein theprior fiscal year. The growth in earnings per share was less
than thegrowth in net income for the fiscal year ended September 30,
2004 due to the effect of the issuance of Company common stock in
connection with acquisitionsandin connection with the exercise of
stock options.
Segment Information
Pharmaceutical Distribution Segment
Pharmaceutical Distribution operating revenue of$48.1 billion for
the fiscal year ended September 30, 2004 reflects an increase of 8%
from $44.7 billion in the prior fiscal year. The Company’s change in
accounting for customer sales returns had the effect of reducing
operating revenue growth by 1% for the fiscal year ended September
30, 2004. Duringthe fiscal year ended September 30, 2004, 59% of
operating revenue was from sales to institutional customers and 41%
was from sales to retail customers; this compares to a customer mix
in the prior fiscal year of 57% institutional and 43% retail.
In comparison with prior-year results, sales to institutional
customers increased 12% in fiscal 2004 primarily due to theabove
market rate growth of the specialty pharmaceutical business and higher
revenues from customers engaged in the mail order sale of pharmaceu-
ticals,which was offset in part by the discontinuance of servicing the
VA during the fiscal year ended September 30, 2004 as a result of
losing a competitive bidprocess.TheVA contract was terminated in
May 2004 and contributed 4.8% and 7.8% of the segment’s operating
revenue in the fiscal years ended September 30, 2004 and 2003,
respectively. In March 2004, Caremark Rx, Inc. acquired Advance PCS,
one oftheCompany’s largest customers. As a result, the Company’s
contract with Advance PCS was terminated in August 2004. Advance
PCS accounted for approximately 4.4% and 4.8% of the segment’s
operatingrevenue in the fiscal years ended September 30, 2004 and
2003, respectively.
Sales to retail customers increased 2% over the prior fiscal year.
The independent retail sector experienced strong double-digit sales
growth while sales in the chain retail sector decreased by 6% due
to sales declines experienced by certain large regional retail chain
customers. Additionally, retail sales in the first-half of fiscal 2004 were
adversely impacted by the prior fiscal year loss of a large customer.
This segment’s growth largely reflects U.S. pharmaceutical
industry conditions, including increases in prescription drug utilization
and higher pharmaceutical prices offset, in part, by the increased use
oflower-priced generics. The segment’s growth has also been impacted
by industry competition and changes in customer mix. The Company’s
Specialty Group has been growing at rates in excess of overall
pharmaceutical market growth. The majority of this Group’s revenue
is generated from the distribution of pharmaceuticals to physicians
who specialize in a variety of disease states, such as oncology,
nephrology, and rheumatology. Additionally, the Specialty Group
distributes vaccines and blood plasma. The Specialty Group’s oncology
business has continued to outperform the market and continues to be
the Specialty Group’s most significant contributor to revenue growth.
Pharmaceutical Distribution gross profit of $1,648.7 million in the
fiscal year ended September 30, 2004 reflects a decrease of 3% from
$1,700.0 million in the prior fiscal year. As a percentage of operating
revenue, gross profit in the fiscal year ended September 30, 2004 was
3.43%, as compared to 3.81% in the prior fiscal year. The decline in
gross profit as a percentage of operating revenue was the result of: a
reduction in profits related to pharmaceutical manufacturer price
increases; the VA contract loss; the continuing competitive environ-
ment, which has led to a number of contract renewals with reduced
profitability; and the negative impact of a change in customer mix to a
higher percentage of large institutional, mail order and chain accounts.
The Company’s cost of goods sold includes a last-in, first-out (“LIFO”)
provision that is affected by changes in inventory quantities, product
mix, and manufacturer pricing practices, which may be impacted by
market and other external influences.
Pharmaceutical Distribution operating expenses of $900.1 million
in the fiscal year ended September 30, 2004 reflect a decrease of 1%
from $908.7 million in the prior fiscal year. As a percentage of operat-
ing revenue, operating expenses in the fiscal year ended September 30,
2004 were1.87%, as compared to 2.03% in the prior fiscal year, an
improvement of 16 basis points. The decrease in the operating expense
percentagereflects the changing customer mix described above, effi-
ciencies of scale, the elimination of redundant costs through the inte-
gration processes,continued emphasis on productivity throughout the
Company’s distribution network, and a significant reduction in bad
debt expense of $33.9 million (including a $17.5 million reduction
of a previously recorded allowance for doubtful account as a result
of a settlement with a former customer), as previously discussed.
Pharmaceutical Distribution operating income of $748.6 million
in the fiscal year ended September 30, 2004 reflects a decrease of 5%
from $791.2 million in the prior fiscal year. As a percentage of operat-
ing revenue,operating income in the fiscal year ended September 30,
2004 was 1.56%, as compared to 1.77% in the prior fiscal year. The
decline over the prior-year percentage was due to a reduction in gross
margin in excess of the decline in the operating expense ratio.
PharMerica Segment
PharMerica operating revenue of$1,575.3 million for the fiscal
year ended September 30, 2004 reflects a decrease of 2% from
$1,608.2 million in the prior fiscal year. PharMerica’s decline in
operating revenue was primarily due to the loss of two significant
customers in the Workers’ Compensation business, the discontinuance
of the sale of healthcare products within the Long-Term Care business
and the loss of a Long-Term Care business customer because it was
acquired by a customer of a competitor.
PharMerica gross profit of $479.7 million for the fiscal year ended
September 30, 2004 reflects a decrease of9% from $525.6 million in